Warehouse overstock can generate tax deduction

It's tax season, which means most Americans are sorting their receipts, but how would you account for a warehouse full of inventory that had stubbornly refused to sell? Now, your company can claim a tax deduction for donating it all to charity.

Supply chain professionals commonly manage excess inventory through inefficient strategies, says Gary C. Smith, president of the National Association for the Exchange of Industrial Resources (NAEIR), a nonprofit group that collects unsold merchandise donated by companies and gives it to schools, churches, and nonprofits.

Faced with extra goods, companies typically lease additional expensive warehouse space; liquidate the merchandise for pennies on the dollar; give it away and cheapen the brand's reputation; sell it to employees, who often turn around and resell it online; or simply send it to a landfill.

A little-known option solves all these problems at once, Smith says. The IRS allows certain corporations to receive a federal tax deduction of up to twice-cost when they donate excess inventory to qualified organizations. NAEIR expedites the process, under a provision known as tax code IRC Section 170(e)(3), by accepting the donations as a middleman and steering them to a list of prescreened charities.